WORD ON THE STREET: One of the Consumer Financial Protection Bureau's (CFPB) primary objectives is to bring clarity to the marketplace by promoting easy-to-understand disclosures that make prices and risks clear up-front. This will ensure that consumers get the information they need to make the financial decisions they believe are best for themselves and their families.
A basic premise of an efficient, well-functioning market is that the buyer and the seller both understand the terms of the deal, and that buyers are able to make comparisons among products. But in the years leading up to the financial crisis and continuing through today, in many consumer financial markets, that was not the case.
We saw the most egregious example of this in the mortgage industry during the housing bubble, when the fastest-growing mortgage products were some of the most complicated: hybrid adjustable-rate mortgages (ARMs), option ARMs and interest-only loans. The potential costs and risks of these mortgages were often not clearly understood. To properly calculate the costs and risks, borrowers needed sophisticated knowledge of things like rate caps and rate spreads. The result was that too many consumers ended up with mortgages they couldn't afford.
The bureau is doing what it can to fix this lack of transparency in financial product markets. With our Know Before You Owe mortgage initiative, we are creating a single, shorter, more useful mortgage disclosure form that satisfies the requirements of the Truth in Lending Act and the Real Estate Settlement Procedures Act. Congress asked us to combine these two forms, and our work in this area will both reduce regulatory burden and make the costs and risks of a loan clearer so that consumers can choose the mortgage that best meets their needs.
Our goal with the form is to reduce unwarranted regulatory burden for the industry at the same time that we improve the usefulness of information provided to consumers. Before we began designing the sample form, we reached out to the public, industry participants and market experts to find out what on the current disclosure forms is helpful for consumers, what is not, and what is information overload. What do consumers really need to know? And what approach makes the most sense for the industry?
We incorporated that feedback as we developed alternative forms, the first two of which we introduced back in May. We invited comments from stakeholders and displayed the forms on our website. We have continued to seek public comments through four subsequent rounds of testing, and have received more than 22,000 comments to date.
Following the rules
In the lead-up to the worst financial crisis since the Great Depression, we saw a dramatic growth in lending. From 1999 to 2007, household debt almost tripled to more than $12 trillion. But the regulatory system prior to Dodd-Frank failed to protect consumers from harmful practices in this gigantic lending market.
Perhaps the worst example of that was seen in the mortgage market. Because federal and state rules created a fragmented system of mortgage regulation, supervision, and enforcement, the mortgage market became an unlevel playing field that encouraged irresponsible lenders to shop for the most permissive – or least monitored – legal regime. The opportunity for regulatory arbitrage accelerated a race to the bottom in lending standards.
The Dodd-Frank Act charges the CFPB with making mortgage markets work better for all consumers, regardless of what charter the business falls under. When we have a director in place, brokers, originators and servicers who are not part of a bank or bank affiliate will – for the first time – be subject to a regime of examination and supervision by federal regulators.
Our mission is to ensure that brokers, originators and servicers play by the rules, regardless of their charter. It doesn't matter if you're a thrift, bank, finance company, industrial loan company or investment bank. If you want to be in the business of consumer finance, then you've got to play by the rules like everyone else.
To this end, the bureau has published its Supervision and Examination Manual, the guide for our examiners to use in overseeing companies that provide consumer financial products and services. We have also released our examination procedures for mortgage servicing. Both provide direction to our examiners on how to determine if providers of financial products and services are complying with federal consumer financial laws – and how to determine if the providers have adequate policies and procedures in place to ensure continued compliance.
We consider both the servicing procedures and the broader Supervision and Examination Manual to be evolving documents. We welcome feedback from all stakeholders. Over the coming months, we will release more guides that explain specific examination procedures for particular products and lines of business.
While the CFPB will examine large banks and their affiliates first, when the CFPB has a director in place, these guides will be used across the markets we supervise. Our goal is to help promote fair, transparent and competitive consumer financial markets where consumers can have access to credit and other products and services, and where providers can compete for their business on a level playing field where everyone has to play by the rules.
One of the bureau's central responsibilities is to identify and address outdated, unnecessary or unduly burdensome regulations. The bureau has a unique opportunity to streamline and simplify rules to ensure that they are truly making consumer financial markets work better. The bureau has inherited from other agencies numerous regulations, many of which have been on the books for years. Changes in technology, market practices and the legal landscape may have caused some of these rules to become obsolete, unnecessary, redundant or counterproductive.
Later this month, the bureau will initiate a targeted review of these rules in search of ways to update and streamline the regulations. Consistent with the bureau's philosophy, we will ask the public to participate in this process from the beginning.
The bureau will invite public input to identify specific rules that should be priority candidates for review, to provide a fact base to help the bureau evaluate the costs, benefits and impacts of those rules, and to suggest alternatives that may achieve the goals of the underlying statute at a lower cost. This input will be vital to the bureau as we seek to determine how we can make regulations more effective at achieving intended benefits for consumers while lowering costs for lenders.
Raj Date is the special advisor to the secretary of the U.S. Treasury for the Consumer Financial Protection Bureau. This article was adapted from prepared testimony that Date gave Nov. 2 before the House Financial Services Committee. Click here to read his testimony in its entirety.